The State of Growth Capital for Technology Companies – an interview with Battery Ventures General Partner, Chelsea Stoner

Vintage Annual CEO Summit 2020

Chelsea Stoner, General Partner, Battery Ventures – Vintage Annual CEO Summit 2020

 

Interview Transcript 

Ameer Awadiyeh:

Hello everybody, as you can see, unfortunately, I couldn’t be in the office for this as I am in quarantine, but I’m thrilled to welcome our next guest, Chelsea Stoner. Chelsea is a general partner at Battery Ventures where she focuses on investments in the software and healthcare IT sectors, particularly on vertically focused SaaS companies. Chelsea serves on the boards of Avalara, Curve Dental, PageUp and Redox and her previous investments include Brightree, Glassdoor, Groupon, Guidewire, Marketo and WebPT, among others. In 2013, Chelsea was named for the Forbes Midas Hot Prospects list of up and coming VCs and in 2018, she was included on Business Insider’s list of 23 top VCs in enterprise tech. Chelsea received a bachelor of science with honors in chemical engineering from Northwestern University and an MBA from the University of Chicago. Chelsea, welcome and thank you for participating in our sixth annual CEO summit.

Chelsea Stoner:

Thanks for having me Ameer, glad to be here.

Ameer Awadiyeh:

Great. Chelsea, from a degree in chemical engineering, to one of the most successful investors, please tell us, how did you transition into the world of VC?

Chelsea Stoner:

I had a very circuitous path. I was an engineer, as you said, who decided I didn’t want to be in the lab all day. I did kind of the thing that a lot of folks who don’t really know what they want to be when they grow up do, I did consulting. I was with Anderson Consulting at the time. I loved it, I got to travel the world. I was there for about four years and I decided to go back to business school. And that’s where I fell in love with investing and just kind of the whole everything about it, from the kind of consultative approach that I knew, to kind of the hard finance skills. And so right after school to a middle-market, private equity firm in San Francisco. And then a couple of years later, I met a couple of partners from Battery and they convinced me to move from sunny San Francisco out to snowy Boston to really become part of their ever-expanding more late-stage investing team.

Chelsea Stoner:

Right before they were looking to expand the team, they had done one of the first software take privates, actually, that occurred in 2003, a company called me to manage and they had just such great returns and it was a really good kind of risk-return that they said, “Hey, let’s expand this team.” And I think what they liked about me because I’m not kind of a typical hire if you will, for venture. But they liked that I had a technical background. I had actually programmed quite a bit and that I knew how to do balance sheets. I knew how to read balance sheets and cash flow statements, which a lot of the early stage guys, that wasn’t really kind of their key skill. I think they liked that combination. I packed my bags and moved to Boston.

Ameer Awadiyeh:

Well, I guess a lot of the VC hires are non-typical, but that’s great. Chelsea, with public market investors getting into growth investing and many early-stage of VCs raising opportunity funds, there is no question that the growth stage is more competitive than ever. Could you please share with us, what has Battery been doing to win deals in such an environment?

Chelsea Stoner:

Yeah, it’s tough out here. It’s honestly difficult to stay ahead of the game with so many folks kind of coming into the market. I’d say there’s a couple things that have worked really well for us. Number one, we’ve been doing this for 37 years and our roots are very sematic and research intensive. And so we’ll spend six to nine to 12 months on a particular area and really go deep to understand all of the nuances around product market and really identify the category leaders or who we believe that the leaders to be.

Chelsea Stoner:

And just all of that kind of upfront work, I would say makes it a lot easier to have conviction to pay up because that’s what we are. We’re paying up, this is a hot market. And then, I’d also say that a lot of that research is helpful in walking the company through it because they get to see how we think, they get to see how we will be partners and board members and kind of how we can be helpful in that way to just kind of come in knowing a lot about the space. And so I would say that’s kind of number one.

Chelsea Stoner:

Number two is, we are a stage agnostic firm, so we are software investors, but we can do everything from very early stage seed deals, all the way to full majority control and everything in between, which is great. And so that enables us in markets where a particular stage is higher priced or frothy, we can move into other areas. And so we’ve seen, of course the later stage, the larger scale growth rounds be very, very expensive recently. And we’ve kind of bifurcated and moved either early stage, we’re doing a lot of series A, or have gone more to the growth buyout side of things, where we find there are some super compelling opportunities. Those are kind of the two key factors that we think about in this environment.

Ameer Awadiyeh:

Got it, got it. I have two follow up questions for you, Chelsea. Can you share with us, what are some of the areas or investment themes that Battery has been looking into recently? And have you made any adjustments due to COVID-19?

Chelsea Stoner:

Ooh, good question. We were looking at a bunch of different things. There’s 10 investing partners at the firm and so each of us has kind a area of focus and a number of different kind of projects going on at any given time. And so, I’d say we’re continuing to spend a bunch of time in vertical SaaS and looking at more interesting areas, just given how inexpensive it is to start a SaaS company these days. A lot of the kind of smaller verticals that maybe didn’t make sense from somebody to take the time or effort to build software for that space is now very, very attractive. And so we’re spending a bunch of time there. There’s some really interesting things going on in the [inaudible 00:06:36] space with the need to share information. Redox is a good example of getting integration and all of the data out of the EMR. And so a lot of different themes.

Chelsea Stoner:

But your question on COVID is a good one. I think, gosh, sometimes it takes kind of a hit over the head and a shock to really wake you up, but for the last probably five or six years, we have really been thinking about transactional business models. Payments as an example, as those are valued at the same multiples as traditional SaaS kind of recurring revenue businesses. And in many cases, we’ve seen companies that have completely transitioned, so are only doing payments and kind of giving their software away for free.

Chelsea Stoner:

And in this market and in COVID, we saw that not all revenue is created equally and our transactional businesses really took a hit. And so I think it has sparked us now, obviously this is a circumstance that hopefully we don’t see you again, sort of a black swan, if you will, but it does really make us kind of think, gosh, should these businesses be valued in the same way? And certainly doesn’t mean that we don’t like payments business, quite the opposite. We do, I think it just becomes a question of, what’s the ultimate value for that? And then how do you diversify to ensure that when a particular area goes down, how do you still have a stable business?

Ameer Awadiyeh:

Got it, got it. And would you advise founders to take money from the growth or opportunity funds of their existing early stage investors, saving a lot of valuable time on fundraising? Or alternatively seeking a dedicated growth stage fund, as you mentioned?

Chelsea Stoner:

Yeah. It’s interesting. I think like all things, it really depends. I think that the biggest factor is the partner and really the level of experience that the person has with the next phase of growth and exits. If your goal is to grow from, say you’re 20 today and you want to get to a 100 and 200 and 400, have they seen that path before? Do they know all of the pitfalls or a lot of the pitfalls to be helpful in helping you avoid those? If your goal is to IPO, has the person been through an IPO process before? There’s a lot to that. There are certainly a lot of early stage investors who have seen that full spectrum. And there are some that maybe haven’t.

Chelsea Stoner:

I think that that is really how I would think about it and how we advise our boards to think about kind of the next partner that they bring on. Kind of where I might differ a little bit on that thinking is if it is a true kind of pre-IPO round where there’s not really a board seat, but you’re really kind of rounding out and getting ready for that IPO, we found that having more of the crossover investor, bringing in a T. Rowe or a Fidelity can be really helpful for when you do go public and having part of that book built out if you will. That’s kind of how I would feel about it.

Ameer Awadiyeh:

Got it. That’s interesting. Chelsea, there are two approaches to fundraising, raise as much as you can or raise as much as you need. Considering the current market dynamics and uncertainties, what is your advice to the CEOs raising their next growth round?

Chelsea Stoner:

Yeah. I just go back to, it really depends on your situation, but competitively market wise, we tend to have more of a disciplined growth mindset. And so, that’s sometimes challenging when you’re in the position of selling money. The companies don’t necessarily need it, but we just feel like there’s better businesses end up being built with a little bit of scarcity. We found that it really drives innovation.

Chelsea Stoner:

One of the examples I would give is one of my businesses that we sold last year called WebPT. They’re a practice management system focused on the physical therapy space. Everything that a physical therapist needs to run their practice. It’s an incredible story of their entire history, they only raised a million dollars in primary. When we came in, it was all secondary. We were giving some founder liquidity and had one of the most innovative sales and marketing programs I’ve ever seen. And so, a little bit of that scarcity really, really drives innovation.

Chelsea Stoner:

On the flip side, if you’re in a market where the product is really sticky and it’s really all about a land grab versus competitors, then that strategy takes a lot of dollars to execute the playbook. And so that’s where I go back to it. It kind of really depends on what market you’re playing in and what the competition looks like.

Ameer Awadiyeh:

Got it, got it. Makes sense. Chelsea, you mentioned WebPT and I know Battery has been investing outside the traditional coastal US tech hubs for a while now and I believe that involves quite a lot of travel. I was wondering how have you been dealing with this post COVID-19? And do you maybe have any tips for founders on how to convince the growth stage investors to fund their startups over Zoom?

Chelsea Stoner:

I love that question. It’s actually pretty funny. I feel like I should be asking founders how I can be more convincing over Zoom to pick us in this environment. But yeah, gosh, I haven’t been on a plane since February and I used to be on a plane at least once a week, if not three times a week. And so it has really changed pretty dramatically how we work and it’s been pretty nice actually being at home and getting some real kind of family time, but I’m starting to get the itch. But no, we’ve been able to really do a lot of this over Zoom. There’s something nice about being able to see a person’s face close up, which kind of sounds odd, but you’re not in a conference room sitting across a table, but the dinners and kind of the personal interactions that are outside of the meeting time and outside of the diligence time, we certainly miss. And so that hopefully comes back soon, but we’ve been pretty productive just on video too.

Ameer Awadiyeh:

Well hopefully it will be back very soon. Chelsea, one of Battery’s most notable value adds is bringing its vast experience in M and A strategies and market insights. Can you share with us what are some of the do’s and don’ts in using acquisitions as growth opportunities? And I’d love if you could maybe give an example of a failed merger and what lessons have you learned from it?

Chelsea Stoner:

Yeah. I guess, first of all, I’d say it’s, we find it very difficult to execute on both an organic growth playbook as well as do acquisitions at the same time. But and we tend to say, “Gosh, let’s really focus on kind of our organic growth story here.” That said, where we have seen a lot of value in acquisitions while you’re on this kind of high organic growth side of things has been I’d say two-fold. One, customer buys. And so, if there’s legacy software and I’m talking software here, just because it’s what I do and love. Legacy software competitors, where it’s a relatively easy lift to convert over to your SaaS platform. We just think of that as a customer buy. How much is it going to cost you to acquire that customer organically versus if you can buy an entire legacy base and do that over time?

Chelsea Stoner:

We’ve done a bunch of these actually and it’s really incredibly valuable. There’s sort of a playbook around it, of how to execute it. But the first one that we did with this was Brightree, another application SaaS practice management player in the healthcare space. And we ended up buying three legacy competitors and each one actually ended up yielding a 5X increase on the revenue of those businesses once we converted them over to Brightree. And so it can be really incredibly valuable to run that playbook. I’d be on the lookout for those.

Chelsea Stoner:

The other side of things, more product buys. And so maybe we’re always asking ourselves, “What on the roadmap should be buy versus build?” And in a number of cases, we have found our customers, if we have a really good distribution channel and a number of customers in a given market, what other products and services do they want? They would probably rather buy from less vendors and so kind of how do we get more wallet share there? And we have found on those product buys for that to be a very compelling kind of more revenue synergy way of growing as well. But it’s not for the faint of heart. It does take a lot of time and thoughtfulness around kind of strategy development.

Chelsea Stoner:

Yeah, so on your question around challenges and we’ve done so many acquisitions, we have certainly seen our share of ones that haven’t really lived up to the expectations. I think if I had to chalk it up to a couple things, one, it’s a lot of usually kind of cultural issues. Not necessarily things that you can see. But obviously, we’re ultimately buying software businesses and those are people. And so if we, back to my product buy, if we’re buying an innovative company and the founders just are not a cultural fit and they leave, then all of a sudden that product buy probably wasn’t a good outcome. And so, we tend to spend a lot more time on this question around cultural fit than I think we had historically. That’s number one.

Chelsea Stoner:

Number two I’d say the international acquisitions, we’ve done a number of these as well. And they are really tough. It’s just a new degree of difficulty to execute those well. It obviously always comes down to people again there as well, but I think having somebody on the ground for a meaningful time, both pre-close for the diligence, as well as after close is very, very important. Because we’ve had, I think those have probably, if we look across the portfolio, that the international acquisitions have probably been the bulk of the ones that haven’t gone so well.

Ameer Awadiyeh:

Agree. I totally agree with you on the importance of cultural fit, of course and the complexity of international acquisitions. Chelsea, one final question for you, being the first and only female partner at Battery Ventures, what do you think is the best way to promote diversity and inclusion in the venture ecosystem? And what has Battery done on the issue?

Chelsea Stoner:

Yeah, first of all, thanks for the question. Of course it’s a topic near and dear to my heart. It’s been interesting that it’s really only kind of been a topic of concern in recent years. I will say first off, I like many capitalists believe in doing things only if they’re right for business. And in our business, that ultimately means what yields the best returns? One of the actual recent studies, a professor by the name of Siri Chilazi out of Harvard has this great site. She actually just came and spoke to our firm about two months ago, just around gender diversity and showing that it actually does impact returns in a meaningful way, in a positive way. And so I think that has been a really good attention grabber and sort of, let’s kind of focus on that industry to get that across.

Chelsea Stoner:

But what is Battery doing? I’m very proud, probably four years ago, we started an internal diversity and inclusion committee here. And if you remember, that was the time of the kind of crazy Silicon Valley cuddle puddle rumors and stuff going on. And so we said, “Oh my gosh, we need to not just help our portfolio companies make sure this stuff is addressed, but really first off help us. How can Battery be better? We certainly can’t tell for our portfolio companies, how to do business, if we don’t have our house in order.” We put the committee together, we started with recruiting and actually hiring very, very differently. We implemented the Rooney Rule. I don’t know if you’re familiar with that, Ameer, but it has really changed the lens.

Chelsea Stoner:

Basically what that’s done is said, “Everybody that you interview, you need to have 50% diverse candidates in order to even kind of move forward in the process.” And it’s really challenged us to look in different areas. We were hiring a lot of folks with investment banking backgrounds and I look at my own background. It was so different than most of the associates and analysts we had. We’ve also gone to college campuses. We’ve started recruiting directly from college and that’s been very, very, just a great program for us. And so we’ve really changed the lens. In fact, 75% of our analyst class who started over the summer are diverse candidates. And so it’s been super exciting to see just the impact a couple of years makes to the lens. Hopefully, we don’t have senior folks yet, but hopefully, over time, they’ll grow into more senior roles.

Ameer Awadiyeh:

This is great. This is a very encouraging. Chelsea, I really enjoyed this and I’m sure the CEOs have gained so much great insight so thank you so much for joining us.

Chelsea Stoner:

Wonderful. Thank you so much for having me Ameer. Appreciate it.

Ameer Awadiyeh:

Great. We’re done.

 

Chelsea Stoner – Bio

Chelsea Stoner joined Battery Ventures in 2006 and focuses on investments in the software and healthcare-IT sectors. She is particularly interested in vertically focused SaaS companies. Chelsea serves on the boards of Avalara (NYSE: AVLR), Curve Dental, PageUp and Redox. Her previous investments include Brightree (acquired by ResMed), Data Innovations (acquired by Roper Industries), Glassdoor (acquired by Recruit Holdings), Groupon (NASDAQ: GRPN), Guidewire (NYSE: GWRE), Intacct (acquired by Sage), Marketo (NASDAQ: MKTO, acquired by Vista Equity Partners), Practice Fusion (acquired by Allscripts), RealPage (NASDAQ: RP), WebPT (acquired by Warburg Pincus) and ClearCare (acquired by Wellsky).

In 2013, Chelsea was named to the Forbes Midas “Hot Prospects” list of up-and-coming venture capitalists, and in 2018 she was included on Business Insider’s 23 Top Venture Capitalists in Enterprise Tech list.

Prior to Battery, she was an associate at the private equity firm Key Principal Partners. Earlier in her career, Chelsea was a manager at Accenture, where she led technology and strategy projects. She also has held positions with Merrill Lynch in Hong Kong and with Classified Ventures. She received a BS with honors in chemical engineering from Northwestern University and an MBA from the University of Chicago. She also currently sits on the Northwestern University Engineering School Board. Currently Chelsea serves on the Healthcare Technology Advisory Council for the Cleveland Clinic.

 

 

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